A firm that strongly believes in their residual dividend policy had investment opportunities worth Rs. 100 Crores. Its earning in the current period was also Rs.100 crores. The target capital structure of the firm involved a debt equity ratio of 1:1. Following its policy, the firm decided to fund the investment opportunities with Rs.50 crores debt and Rs. 50 lakhs from earnings. The remaining Rs.50 lakhs from earnings was distributed as dividend. Do you think that the firm was right in raising debt? What would be the implications on the value of the firm if it had decided to fund the investment entirely with the earnings

A firm that strongly believes in their residual dividend policy had investment opportunities worth Rs. 100 Crores. Its earning in the current period was also Rs.100 crores. The target capital structure of the firm involved a debt equity ratio of 1:1. Following its policy, the firm decided to fund the investment opportunities with Rs.50 crores debt and Rs. 50 lakhs from earnings. The remaining Rs.50 lakhs from earnings was distributed as dividend. Do you think that the firm was right in raising debt? What would be the implications on the value of the firm if it had decided to fund the investment entirely with the earnings

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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